Nortel is heading for a breakup, becoming a much smaller firm focusing on hardware and software solutions, such as leading edge IP-PBXs aimed at business and governments, including contact centers. Nortel’s (News - Alert) future may also hinge on buildings its relationship with Microsoft, a union formed in 2006 to promote unified communications solutions.

 

The Globe and Mail is reporting today that Nortel is seriously examining offers from at least three bidders for the Metro Ethernet division and is looking at selling others to avoid bankruptcy. The firm said that it was looking at seeking protection from creditors.

 

Analysts told the Canadian newspaper that the firms most likely to bid on the unit, which makes gear for carrying video and Internet data within cities, are Nokia Siemens Networks, Telefon AB LM Ericsson, Huawei and Cisco.

 

When Nortel announced plans to sell the unit, analysts estimated it would fetch between $800 million and $1 billion, but have since said valuations have dropped because of the recession.

 

Driving Nortel’s move is that it is quickly burning through $2.6 billion of cash-on-hand. It has a debt of $4.5 billion that starts to become due July 11, 2009.

 

The paper also speculated that Nortel may parcel off its carrier products: hardware and software switching gear sold to telecommunications firms. It based this prediction on Nortel’s plans to reorganize itself into just three business units beginning in 2009: Metro Ethernet, Carrier Networks, and Enterprise.

 

“The move splits the company into convenient slices for a sale and leaves its small but promising communications software section within the Enterprise division,” said the paper.

 

What Nortel is hoping for is preventing what had happened to another Canadian icon, the T. Eaton and Company department stores. The Eaton’s department store chain, the maple leaf nation’s largest, died in the late 1990s, a victim of a shift from one-store-fits-all full service/full price department store retail to big box, specialty, and deep discount shopping.

 

A similar fate may await Nortel, North America’s largest communications manufacturer, predicts Jon Arnold, a Toronto-based telecommunications consultant. The parallels with the Eaton’s department store chain exist because Nortel has a wide variety of products from small PBXes for offices to IP-enabled IVR-supporting ACDs for contact centers, data routers for Internet traffic, and to 4G wireless switches.

 

Yet that department store array, of being all things to all markets, is part of Nortel’s problem, explains Arnold, along with a lack of vision, inadequate channel development, and repeated accounting mishaps that forced it to restate earnings, which hurts credibility with customers. Nortel has not marketed its solutions well, and the wide selection has made it difficult for the firm to achieve an easily promotable identity amongst customers and prospects.

 

“Nortel has historically ridden on its customer base: as long as good engineering kept products in the limelight they could do fine,” Arnold said. “Yet it has lost whatever market leadership position it had. It has had so many setbacks that they are in a hole that is seemingly impossible to get out of intact at this point. There is now so much competition in the marketplace that buyers can pick and choose vendors. They are reluctant to deal with those, like Nortel, that have financial problems.”

 

Arnold contrasts Nortel with Avaya, which has a similar heritage, manufacturing products for the Bell system, but which is now focused on enterprise switching and routing. Avaya had been spun off from Lucent which was hived off by AT&T (News - Alert). Alcatel then acquired Lucent (Alcatel-Lucent).

 

Avaya (News - Alert), he says “has stuck to its knitting,” focusing on its core products, aggressively expanding its application developer ecosystem, and concentrating on marketing through its channels, none of which Nortel has done.

 

Arnold believes that Nortel’s future also lies in the enterprise route, provided it can overcome its channel and marketing weaknesses along with maintaining, cross-selling, and upselling to its large, strong customer base, including contact centers.

 

The key for a new Nortel is developing its UC-based partnership with Microsoft (News - Alert), which has the channels and the marketing. That relationship will, however, depend on Microsoft. The software giant has other business relationships including on the contact center side with Aspect.

 

“The key question for Nortel going forward is how much value does Microsoft see in its existing and in an expanded relationship,” Arnold said. “Microsoft has the software solutions platform and market play but it is new to voice; Nortel offers advanced enterprise-scaled technology. Microsoft is also locked into competition with Cisco; Microsoft believes software is the future while Cisco thinks it belongs to the network. A strengthened alliance with Nortel would give Microsoft a strong entrée into Cisco’s markets. Yet Nortel needs Microsoft more than Microsoft needs it.”